As a senior economist and central bank strategist, I have analyzed the transition between the January 30, 2008, and March 10, 2008, communications.
It is critical to note a fundamental structural shift here: the January 30 document was a standard monetary policy statement focused on the federal funds rate and macroeconomic outlook. The March 10 document is a crisis management announcement focused on liquidity facilities and international coordination.
~~The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.~~
~~Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.~~
~~The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.~~
~~Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.~~
~~Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.~~
~~In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco.~~
Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets. Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures. To that end, today the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing specific measures.
Federal Reserve Actions: The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.
In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.
The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion.
Information on Related Actions Being Taken by Other Central Banks [and associated links/FAQs].
| Removed | Added | Significance |
|---|---|---|
| Macroeconomic outlook (Inflation, Labor, Growth) | G-10 Central Bank coordination language | Shift from domestic economic management to global systemic stability. |
| Federal Funds Rate target adjustment | Term Securities Lending Facility (TSLF) | Transition from "Price" (rates) to "Quantity" (liquidity/collateral) tools. |
| Standard voting record/Discount rate | Swap line expansions (ECB/SNB) | Recognition of a global dollar shortage; Fed acting as global lender of last resort. |
The committee has shifted Aggressively Dovish, though not in the traditional sense of lowering interest rates. This is a shift toward "Emergency Mode."
The transition from a standard policy statement to a coordinated international liquidity announcement indicates that the Fed has moved past the stage of "fine-tuning" the economy via the federal funds rate and has entered a phase of systemic firefighting. By expanding the TSLF and swap lines, the Fed is signaling that the primary threat is no longer a slowdown in GDP, but a total freeze of the global financial plumbing. The total removal of inflation and labor market concerns suggests a "whatever it takes" approach to liquidity provision.